Edgar Filing: Altra Industrial Motion Corp.

aimc-10q_20160930.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-33209

ALTRA INDUSTRIAL MOTION CORP.

(Exact name of registrant as specified in its charter)

Delaware		61-1478870
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

300 Granite Street, Suite 201, Braintree, MA		02184
(Address of principal executive offices)		(Zip Code)

(781) 917-0600

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐ (Do not check if a smaller reporting company.)	Smaller reporting company	☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 19, 2016, 25,884,323 shares of Common Stock, $0.001 par value per share, were outstanding.

TABLE OF CONTENTS

		Page #
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35

PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	38

SIGNATURES		40

EXHIBITS		41

EX-31.1 Section 302 Certification of Chief Executive Officer
EX-31.2 Section 302 Certification of Chief Financial Officer
EX-32.1 Section 906 Certification of Chief Executive Officer
EX-32.2 Section 906 Certification of Chief Financial Officer
EX-101 Certain materials formatted in XBRL

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

ALTRA INDUSTRIAL MOTION CORP.

Condensed Consolidated Balance Sheets

Amounts in thousands, except share amounts

	September 30, 2016			December 31, 2015
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	39,765		$	50,320
Trade receivables, less allowance for doubtful accounts of $2,150 and $2,165 at September 30, 2016 and December 31, 2015, respectively		104,671			94,720
Inventories		121,443			121,156
Income tax receivable		2,644			5,146
Prepaid expenses and other current assets		10,486			11,217
Assets held for sale		4,732			4,597
Total current assets		283,741			287,156
Property, plant and equipment, net		142,748			145,413
Intangible assets, net		90,508			96,069
Goodwill		97,775			97,309
Deferred income taxes		3,197			3,201
Other non-current assets, net		2,489			3,184
Total assets	$	620,458		$	632,332
LIABILITIES, AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	41,845		$	40,297
Accrued payroll		22,141			22,312
Accruals and other current liabilities		36,721			34,990
Income tax payable		3,891			3,563
Current portion of long-term debt		400			3,187
Total current liabilities		104,998			104,349
Long-term debt - less current portion and net of unaccreted discount		209,754			231,568
Deferred income taxes		44,299			44,185
Pension liabilities		9,171			8,328
Long-term taxes payable		670			647
Other long-term liabilities		691			688
Stockholders’ equity:
Common stock ($0.001 par value, 90,000,000 shares authorized, 25,684,806 and 25,772,507 issued and outstanding at September 30, 2016 and December 31, 2015, respectively)		26			26
Additional paid-in capital		122,203			124,834
Retained earnings		193,344			181,539
Accumulated other comprehensive loss		(64,698	)		(63,832	)
Total stockholders’ equity		250,875			242,567
Total liabilities, and stockholders’ equity	$	620,458		$	632,332

The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.

ALTRA INDUSTRIAL MOTION CORP.

Condensed Consolidated Statements of Operations

Amounts in thousands, except per share data

	Quarter Ended				Year to Date Ended
	September 30, 2016		September 30, 2015		September 30, 2016			September 30, 2015
	(Unaudited)		(Unaudited)		(Unaudited)			(Unaudited)
Net sales	$	173,132	$	183,053	$	536,259		$	573,024
Cost of sales		118,957		127,253		369,254			398,765
Gross profit		54,175		55,800		167,005			174,259
Operating expenses:
Selling, general and administrative expenses		36,142		34,279		105,548			105,733
Research and development expenses		4,267		4,210		13,345			13,506
Restructuring costs		3,397		651		6,591			4,994
		43,806		39,140		125,484			124,233
Income from operations		10,369		16,660		41,521			50,026
Other non-operating income and expense:
Interest expense, net		2,815		2,924		8,615			8,858
Other non-operating expense (income), net		45		685		(438	)		606
		2,860		3,609		8,177			9,464
Income before income taxes		7,509		13,051		33,344			40,562
Provision for income taxes		2,196		2,830		9,872			11,326
Net income		5,313		10,221		23,472			29,236
Net loss attributable to non-controlling interest		—		—		—			63
Net income attributable to Altra Industrial Motion Corp.	$	5,313	$	10,221	$	23,472		$	29,299
Weighted average shares, basic		25,726		26,145		25,684			26,140
Weighted average shares, diluted		26,021		26,145		25,813			26,184
Net income per share:
Basic net income attributable to Altra Industrial Motion Corp.	$	0.21	$	0.39	$	0.91		$	1.12
Diluted net income attributable to Altra Industrial Motion Corp.	$	0.20	$	0.39	$	0.91		$	1.12
Cash dividend declared	$	0.15	$	0.15	$	0.45		$	0.42

The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.

ALTRA INDUSTRIAL MOTION CORP.

Condensed Consolidated Statements of Comprehensive Income (Loss)

Amounts in thousands

	Quarter Ended					Year to Date Ended
	September 30, 2016		September 30, 2015			September 30, 2016			September 30, 2015
	(Unaudited)		(Unaudited)			(Unaudited)			(Unaudited)
Net Income	$	5,313	$	10,221		$	23,472		$	29,236
Other Comprehensive income (loss):
Foreign currency translation adjustment		104		(4,474	)		(866	)		(16,242	)
Change in fair value of interest rate swap, net of tax		—		(64	)		—			(283	)
Other comprehensive loss		104		(4,538	)		(866	)		(16,525	)
Comprehensive income		5,417		5,683			22,606			12,711
Comprehensive loss attributable to non-controlling interest		—		—			—			(192	)
Comprehensive income attributable to Altra Industrial Motion Corp.	$	5,417	$	5,683		$	22,606		$	12,903

The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.

ALTRA INDUSTRIAL MOTION CORP.

Condensed Consolidated Statements of Cash Flows

Amounts in thousands

	Year to Date Ended
	September 30, 2016			September 30, 2015
	(Unaudited)			(Unaudited)
Cash flows from operating activities
Net income	$	23,472		$	29,236
Adjustments to reconcile net income to net cash flows:
Depreciation		16,235			16,232
Amortization of intangible assets		6,384			6,437
Amortization of deferred financing costs		590			689
Gain on foreign currency, net		(130	)		(128	)
Accretion of debt discount, net		2,970			2,740
Loss on disposal / impairment of fixed assets		582			856
Stock based compensation		3,370			3,231
Changes in assets and liabilities:
Trade receivables		(10,461	)		(1,552	)
Inventories		(837	)		2,367
Accounts payable and accrued liabilities		3,226			7,106
Other current assets and liabilities		728			(2,609	)
Other operating assets and liabilities		765			(1,060	)
Net cash provided by operating activities		46,894			63,545
Cash flows from investing activities
Purchase of property, plant and equipment		(15,684	)		(19,181	)
Proceeds from sale of land		—			1,201
Net cash used in investing activities		(15,684	)		(17,980	)
Cash flows from financing activities
Payments on term loan facility		—			(16,027	)
Payments on Revolving Credit Facility		(30,870	)		(9,000	)
Dividend payments		(7,784	)		(7,130	)
Proceeds from equipment and working capital notes		2,893			1,100
Borrowing under Revolving Credit Facility		3,000			6,000
Payments of equipment and working capital notes		(2,832	)		(3,639	)
Proceeds from mortgages and other debt		—			7,085
Shares surrendered for tax withholding		(1,288	)		(1,182	)
Payments on mortgages and other debt		(349	)		(352	)
Purchase of non-controlling interest		—			(878	)
Purchases of common stock under share repurchase program		(4,713	)		(14,285	)
Net cash used in financing activities		(41,943	)		(38,308	)
Effect of exchange rate changes on cash and cash equivalents		178			(5,111	)
Net change in cash and cash equivalents		(10,555	)		2,146
Cash and cash equivalents at beginning of year		50,320			47,503
Cash and cash equivalents at end of period	$	39,765		$	49,649
Cash paid during the period for:
Interest	$	5,856		$	5,995
Income taxes	$	7,665		$	10,833

The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.

ALTRA INDUSTRIAL MOTION CORP.

Consolidated Statements of Stockholders’ Equity

Amounts in thousands

(Unaudited)

	Common Stock		Shares			Additional Paid in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total			Redeemable Non- Controlling Interest
Balance at January 1, 2015	$	26		26,354		$	139,087		$	161,061		$	(41,415	)	$	258,759		$	883
Stock-based compensation and vesting of restricted stock		—		76			2,049			—			—			2,049			—
Net income attributable to Altra Industrial Motion Corp.		—		—			—			29,299			—			29,299			—
Net loss attributable to Minority Interest		—		—			—			—			—			—			(63	)
Purchase of Minority Interest		—		—			223						(410	)		(187	)		(691	)
Dividends declared		—		—			—			(11,038	)					(11,038	)		—
Change in fair value of interest rate swap		—		—			—			—			(283	)		(283	)		—
Cumulative foreign currency translation adjustment		—		—			—			—			(16,242	)		(16,242	)		(129	)
Repurchases of common stock - 547,780 shares		—		(548	)		(14,285	)		—			—			(14,285	)		—
Balance at September 30, 2015	$	26		25,882			127,074			179,322			(58,350	)		248,072			—
Balance at January 1, 2016	$	26		25,773		$	124,834		$	181,539		$	(63,832	)	$	242,567		$	—
Stock-based compensation and vesting of restricted stock		—		89			2,082			—			—			2,082			—
Net income attributable to Altra Industrial Motion Corp.		—		—			—			23,472			—			23,472			—
Dividends declared		—		—			—			(11,667	)		—			(11,667	)		—
Cumulative foreign currency translation adjustment		—		—			—			—			(866	)		(866	)		—
Repurchases of common stock - 177,053 shares		—		(177	)		(4,713	)		—			—			(4,713	)		—
Balance at September 30, 2016	$	26		25,685		$	122,203		$	193,344		$	(64,698	)	$	250,875		$	—

The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.

ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

1. Organization and Nature of Operations

Headquartered in Braintree, Massachusetts, Altra Industrial Motion Corp. (the “Company”) is a leading multi-national designer, producer and marketer of a wide range of electro-mechanical power transmission products. The Company brings together strong brands covering over 42 product lines with production facilities in twelve countries. Altra’s leading brands include Ameridrives Couplings, Bauer Gear Motor, Bibby Turboflex, Boston Gear, Delroyd Worm Gear, Formsprag Clutch, Guardian Couplings, Huco, Industrial Clutch, Inertia Dynamics, Kilian Manufacturing, Lamiflex Couplings, Marland Clutch, Matrix, Nuttall Gear, Stieber Clutch, Svendborg Brakes, TB Wood’s, Twiflex, Warner Electric, Warner Linear, and Wichita Clutch.

2. Basis of Presentation

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary to present fairly the Company’s financial position for the interim periods presented, and cash flows for the interim periods presented. The results are not necessarily indicative of future results. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.

3. Recent Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-15, Statement of Cash Flows (Topic 230): Classification of certain cash receipts and cash payments (a consensus of the emerging issues task force) (“ASU 2016-15”). This ASU addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This guidance will be effective for the Company on January 1, 2018. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 is intended to provide more decision-useful information about expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The main provisions include presenting financial assets measured at amortized cost at the amount expected to be collected, which is net of an allowance for credit losses, and recording credit losses related to available-for-sale securities through an allowance for credit losses. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, and must be applied using a modified retrospective approach with earlier adoption permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The updated guidance revises aspects of stock-based compensation guidance which include income tax consequences, classification of awards as equity or liabilities, and classification on the statement of cash flows. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. We are evaluating the impact of adopting this new accounting guidance on our consolidated financial statements.

In February 2015, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). The ASU requires management to recognize lease assets and lease liabilities by lessees for all operating leases. The ASU is effective for periods beginning after December 15, 2018 and interim periods therein on a modified retrospective basis. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 provides a single principles-based, five-step model to be applied to all contracts with customers. The five steps are to (i) identify the contracts with the customer, (ii) identify the performance obligations in the contact, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when each performance obligation is satisfied. Revenue will be recognized when promised goods or services are transferred to the customer in an amount that reflects the consideration expected in exchange for those goods or services. In July 2015, the FASB agreed to delay the effective date of ASU 2014-09 for one year and to permit early adoption by entities as of the original effective dates. Considering the one year deferral, ASU 2014-09 will be effective for the Company beginning on January 1, 2018 and the standard allows for either full retrospective adoption or modified retrospective adoption. The Company is continuing to evaluate the impact that the adoption of this guidance will have on our financial condition, results of operations and the presentation of our consolidated financial statements.

4. Fair Value of Financial Instruments

Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:

•

Level 1- Quoted prices in active markets for identical assets or liabilities.

•

Level 2- Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived

•

Level 3- Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents.

The carrying values of financial instruments, including accounts receivable, cash equivalents, accounts payable, and other accrued liabilities approximate fair value. Debt under the Company’s 2015 Credit Agreement approximates the fair value due to the variable rate nature at current market rates.

The carrying amount of the 2.75% Convertible Notes (the “Convertible Notes”) was $85 million at both September 30, 2016 and December 31, 2015. The estimated fair value of the Convertible Notes at September 30, 2016 and December 31, 2015 was $101.6 million and $91.7 million, respectively, based on inputs other than quoted prices that are observable for the Convertible Notes (Level 2).

Included in cash and cash equivalents at September 30, 2016 and December 31, 2015 are money market fund investments of $0.3 million, which are reported at fair value based on quoted market prices for such investments (Level 1).

5. Changes in Accumulated Other Comprehensive Loss by Component

The following is a reconciliation of changes in accumulated other comprehensive loss by component for the periods presented:

	Gains and Losses on Cash Flow Hedges			Defined Benefit Pension Plans			Cumulative Foreign Currency Translation Adjustment			Total
Accumulated Other Comprehensive Loss by Component, January 1, 2016	$	(140	)	$	(5,807	)	$	(57,885	)	$	(63,832	)
Net current-period Other Comprehensive Income (Loss)		—			134			(1,000	)		(866	)
Accumulated Other Comprehensive Loss by Component, September 30, 2016	$	(140	)	$	(5,673	)	$	(58,885	)	$	(64,698	)

ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

	Gains and Losses on Cash Flow Hedges			Defined Benefit Pension Plans			Cumulative Foreign Currency Translation Adjustment			Total
Accumulated Other Comprehensive Income (Loss) by Component, January 1, 2015	$	143		$	(4,818	)	$	(36,740	)	$	(41,415	)
Cumulative losses transferred from Lamiflex		—			—			(410	)		(410	)
Net current-period Other Comprehensive Loss		(283	)		—			(16,242	)		(16,525	)
Accumulated Other Comprehensive Loss by Component, September 30, 2015	$	(140	)	$	(4,818	)	$	(53,392	)	$	(58,350	)

6. Net Income per Share

Basic earnings per share is based on the weighted average number of shares of common stock outstanding, and diluted earnings per share is based on the weighted average number of shares of common stock outstanding and all potentially dilutive common stock equivalents outstanding. Common stock equivalents are included in the per share calculations when the effect of their inclusion is dilutive.

The following is a reconciliation of basic to diluted net income per share:

	Quarter Ended				Year to Date Ended
	September 30, 2016		September 30, 2015		September 30, 2016		September 30, 2015
Net income attributable to Altra Industrial Motion Corp.	$	5,313	$	10,221	$	23,472	$	29,299
Shares used in net income per common share - basic		25,726		26,145		25,684		26,140
Dilutive effect of the equity premium on Convertible Notes at the average price of common stock		295		-		123		38
Incremental shares of unvested restricted common stock		-		-		6		6
Shares used in net income per common share - diluted		26,021		26,145		25,813		26,184
Earnings per share:
Basic net income attributable to Altra Industrial Motion Corp.	$	0.21	$	0.39	$	0.91	$	1.12
Diluted net income attributable to Altra Industrial Motion Corp.	$	0.20	$	0.39	$	0.91	$	1.12

During the quarter ended September 30, 2016, the Company’s common stock price exceeded the current conversion price of the Company’s Convertible Notes, resulting in additional shares being included in net income per common share in the diluted earnings per share calculation above.

7. Inventories

Inventories at September 30, 2016 and December 31, 2015 consisted of the following:

	September 30, 2016		December 31, 2015
Raw materials	$	35,758	$	34,169
Work in process		11,915		12,864
Finished goods		73,770		74,123
	$	121,443	$	121,156

ALTRA INDUSTRIAL MOTION CORP.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

Amounts in thousands, unless otherwise noted

8. Goodwill and Intangible Assets

Changes in goodwill from January 1, through September 30, 2016 were as follows:

	Couplings, Clutches & Brakes		Electromagnetic Clutches & Brakes		Gearing		Total
Net goodwill balance January 1, 2016	$	25,290	$	24,661	$	47,358	$	97,309
Impact of changes in foreign currency and other		136		29		301		466
Net goodwill balance September 30, 2016	$	25,426	$	24,690	$	47,659	$	97,775

Other intangible assets as of September 30, 2016 and December 31, 2015 consisted of the following:

	September 30, 2016						December 31, 2015
	Cost		Accumulated Amortization		Net		Cost		Accumulated Amortization		Net
Other intangible assets
Intangible assets not subject to amortization:
Tradenames and trademarks	$	39,305	$	—	$	39,305	$	39,625	$	—	$	39,625
Intangible assets subject to amortization: